Fear. You can almost smell it. So far, there's just a whiff of it...a faint odor...a little trace in the air...like the smell in a subway car after a bum has left.
Yesterday, the Dow fell 213 points. Oil dropped to $76. Gold lost $9.
What caused it? What sets off a crash? Yesterday was hardly a crash. But our Crash Alert flag still flies. Because this is a market in danger. It is a market looking for a reason to crash.
You never know for sure when or why markets crash. At a certain point, markets become like drunks who want to play a game of Russian roulette. First, they have to find the revolver. Then, they find the trigger.
It looked to us as though investors were flexing their trigger fingers yesterday. Some blamed China's recent move towards tighter credit (or what they thought would be a move to tighter credit)...others blamed news from the US:
"Jobless claims in US unexpectedly rise," said the Bloomberg report. Here is how the Associated Press described it:
"A surprising jump in first-time claims for unemployment aid sent a painful reminder Thursday that jobs remain scarce six months into the economic recovery.
"The surge in last week's claims deflated hopes among some analysts that the economy would produce a net gain in jobs in January and help fuel the recovery.
"A Labor Department analyst said much of the increase was due to holiday-season-related administrative backlogs at the state agencies that process the claims. Still, economists noted that that would mean claims in previous weeks had been artificially low. Those earlier declines had sparked optimism that layoffs were tapering and that employers would add a modest number of jobs in January.
"The January employment report will be issued Feb. 5. But the surveys used to compile that report were done last week, so economists are paying close attention to the jobless claims figures from that week.
"'The trend in the data is still discouraging,' Diane Swonk, chief economist for Mesirow Financial, wrote in a note to clients. 'Hopes for a positive employment number in January...are rapidly dimming.'"
Anyone who was 'disappointed' by the jobless numbers hasn't been paying attention. Consumer and business credit are falling. That means businesses are not expanding. They're contracting. And that means they need fewer employees.
People without jobs can't shop like they used to...and they can't pay their bills. One out of 4 mortgaged houses is underwater. One in 10 is in foreclosure. Many more will probably go into foreclosure as the depression continues and default becomes more socially acceptable. Previous generations regarded default and foreclosure as a disgrace. Lenders priced this aversion into their lending rates. But now, default is just a shrewd financial move. When the financial costs of defaulting are lower than the costs of paying...that's what borrowers will do. Just like Wall Street.
As the depression continues, attitudes will change... Voters will probably want real change in Washington; that's what the Massachusetts election may be telling us.
But back to our story...
This morning, we see another itchy trigger finger. Stocks are falling in Asia. This time it's blamed on Obama's pledge to punish the banks with higher taxes.
But the real cause of the wobbles on Wall Street is the economy. Trillions' worth of fiscal and monetary stimulus aren't stimulating at all. They're just shifting control of the economy to the feds...and shifting the debt bubble in their direction, too.
Does that make a nation more prosperous? Of course not.
The stock market has been ignoring the fundamentals. It's priced dozens of big companies over 50 times last year's earnings. Overall, stock prices are closer to a top than a bottom. And yet, a depression brings a bottom, not a new top.
We say this with caution. A few years ago, we might have said it with reckless confidence, but we were smarter back then. Now, we even place our breakfast order with caution. You just never know...
No one ever knows exactly what Mr. Market will do. If he wants higher stock prices, he'll get them - no matter what the fundamentals tell us.
But we have to stick with the fundamentals anyway. That's all we've got. And they tell us to watch out. In a 'normal' recession, businesses would be re-hiring by this time in the cycle. They're not doing so. Why? Because it's not a 'normal' recession. It's something quite different. Something we haven't seen in the last 50 years. Something we never wanted to see again. But here it is - a depression. That's what those higher unemployment figures tell us. People who own and run businesses aren't hiring. They know the jig is up. The insiders who own businesses are selling 24 shares for every one they buy.
Unemployment is over 10%...and it seems likely to stay there for a long time. Consumer and business credit are declining - for the first time in half a century. And those trends too seem likely to continue. There are still beaucoup mistakes to correct and a long way down to go.
So relax. Buckle your seat belts. Sell your stocks. And enjoy the show.
"I spent some time driving around over the weekend," began an Irish colleague. "The Irish property market is a disaster. Over in Cork is the highest residential building in Ireland, the Elysium Tower. It was begun a couple of years ago. They have something like 300 units. But they've only sold 7. And now the owner is trying to buy back those 7 properties. It costs him so much to keep the lights on and to maintain the building, he figures he would be better off buying back the 7 units he sold and shutting the whole property down.
"If you wanted to buy something in Ireland now, you could get a very good deal..."
Uh oh. Both good and bad news on our new Trade of the Decade. Japanese shares were rising, last time we looked...because the falling yen makes Japanese exports more attractive.
But to whom are they going to sell? US consumers look like bad prospects. Their real, disposable incomes have gone nowhere in nearly 40 years. In the last two years, household net worth and incomes have been falling. Credit is falling too. The young have no jobs - even the ones with college degrees. One out of 5 defaults on his college debt. And the old have no money. Seniors are holding onto jobs as long as they can...trying to make up for years of failing to save.
China is another big customer. And the Chinese economy is about ready to blow up. Some luxury properties in Shanghai rose 100% last year. And now the authorities are tightening up on credit.
What happens to an export economy when its major customers go broke? We're going to find out... Japan's business leaders sense trouble. Business borrowing is collapsing. It's at its lowest point in 5 years.
This Trade of the Decade could be in for a rocky start.
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- In a Properly Functioning Economy Prices Go Up and Down
- Depression: A Time of Falling Prices
- Let the Economic Depression Burn Itself Out
- How Do You Enjoy a Depression?
- Normally Small Businesses Lead the Economy Out of Recession
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by peterg on 26 January 2010:
[home borrowers will default] "Just like Wall Street."
very funny indeed, and worrying too
Comment by Sam on 26 January 2010:
"A surprising jump in first-time claims for unemployment aid sent a painful reminder Thursday that jobs remain scarce six months into the economic recovery."
I love the use of doublethink by msm.
Comment by Pete on 27 January 2010:
"I love the use of doublethink by msm."
I love the use of groupthink by dra...
What's becoming pleasurably obvious is that while the ASX is still shackled to the DOW, Australian property is completely decoupled from US housing. How long will it take before you come to this this startling conclusion, DD? Whereas Bill's observations about the US situation are entirely believable, there's zero correlation to Oz property. Entirely different ball game. Never was that old homily 'Location, location, location' more relevant... .
Comment by Pete on 27 January 2010:
Oh, apologies, didn't read the article!
I'll keep my mouth shut
Comment by Pete on 27 January 2010:
Just a little too obvious, FluoxMan...
Comment by Dan on 27 January 2010:
A lot of Aesop's fables are finding new relevance to the current discussion. For example that of the tortoise and the hare, or the ants and the grasshopper, etc. There is ultimately no substitute for a steady, honest living. Speculation eventually bites (except when you cheat - but that's not speculation at all), but useful, constructive activity yields sure results (such as profiting from providing housing, or food, or other essentials).
So in a way I am a bit suspicious of the gold bugs' message, which to me is, "don't gamble in stocks or houses, gamble with us!" - there is nothing particularly productive about buying gold. A house at least is useful to somebody.
But there is something very interesting in Bill's article: "Trillions' worth of fiscal and monetary stimulus aren't stimulating at all. They're just shifting control of the economy to the feds...and shifting the debt bubble in their direction, too." Just as private interests essentially control the US military, the key levers of the economy are being handed entirely to private interests also, away from the government, by the very size of the loans being issued. Connecting the dots ought not to be hard beyond that. When the time comes and the idea of dissolving the US and joining some kind of world hegemony is put on the table (with vehement dissent from the public), Congress and the population will find themselves powerless, as all the machinery of the nation - right down to the trucking company that delivers the portable prison cells to the rioting crowd - will have quietly fallen into the hands of whoever it is that controls the federal reserve and military industry.